ELI5: Why Split Stocks?

Last summer, Apple's stock price went from $500 to $125. On face value, this shocking. A drop of 75% for one of the world's most successful and beloved companies. Are iPhones the next BlackBerries? Was there a scandal with Siri? Nope. The reality is much more boring.

It was a matter of corporate accounting. Apple did what many public companies do from time to time. They increased their number of shares - by splitting them. Stock splits can happen in many fashions. 2-for-1, 3-for-1, you get the picture. In Apple's case, 4-for-1.

This means Apple 4x their shares outstanding. Their overall value remained unchanged. Just more shares, worth less a piece.

Seems like a lot of work to get back to same place, no?

There's a reason. Stock splits help increase access. As a stock rises, it becomes more and more difficult to buy. Berkshire Hathaway is a prime example. Through decades of compounded success (and never splitting) a single share is now trading well over a whopping $300K.

You could make the case that greater access means more buyers, thus the price gets bid up. However, there are many examples of stocks dropping after a split. Including Apple, who's value was down following theirs.

Whatever effect it might have shouldn't matter in the long run, the value eventually comes back to fundamentals. The impact on you, the investor is minimal.

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